Red Flags You Won’t See on a CEO’s Resume

For a long time, we have believed that strong corporate governance is enough to prevent CEO malfeasance. However, new research shows that the lifestyle behaviors of executives can spell trouble for companies, regardless of the guardrails in place. Aiyesha Dey, an associate professor at Harvard Business School, has investigated executives’ past criminal records and the cost of their homes and automobiles. Her research has linked an individual’s materialism and propensity for rule breaking to fraud, insider trading, and risky business activities. She says that boards and other hiring bodies should pay more attention to personal behavior when picking organizational leaders. Dey wrote the HBR article “When Hiring CEOs, Focus on Character.”

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.

When you think about it, hiring is an exercise in predicting the future. You’re picturing the outcome you want, and you’re finding out if the person you want will be able to create that future with you. You’ve got their resume, you talk to people who’ve worked with them, and you interview them, ask them their biggest weakness, and there are those intangibles, that little voice that you realize later that you should have listened to.

All that looms even larger when you’re filling the top job at an organization, the chief executive. At stake is the future of the organization, a future that affects so many people. The perfect rendezvous of skill set and leadership is elusive. Today’s guest has been reverse-engineering the performances of CEOs, and has found some surprising correlations between their personal behavior before they were hired and their professional record after they were hired, so much so that you may have never thought to look at these attributes. In fact, many boards don’t.

Aiyesha Dey is an Associate Professor at Harvard Business School, and she wrote the HBR article, When Hiring CEOs, Focus on Character. Aiyesha, so excited to talk to you.

AIYESHA DEY: Thank you, Curt. Thank you for having me.

CURT NICKISCH: How did you get interested in studying this?

AIYESHA DEY: The roots of this go way back to my dissertation. Corporate governance was always of interest to me, and right then, we had the big scandals of Enron and WorldCom and some other companies, and then we had the Sarbanes-Oxley Act that Congress introduced with the host of systemic fixes that’ll prevent fraud, but we had all these controls, but then we have a layer of scandals again, and then we have more regulation, and more fixes, and it got me and my colleagues to think that, “Are we missing something here?”

I mean, it’s not to say that structural fixes aren’t important. They absolutely are, but they’re not perhaps the full solution, so what are we missing? Is there something else, and can we go into the psychology of the person a little bit and see, “What about them matters?” I mean, maybe we all understand, yes, people matter. We need to consider that, but what about them do we consider? What do we look for?

CURT NICKISCH: What is though, the customary way that corporate boards and executive committees go about hiring a CEO? What’s their MO?

AIYESHA DEY: Companies probably first identify, “What is it that we want to do, and who is the best person to get us there?” Like if you want to really grow, you want someone who’s been successful in growing a firm and expanding, so you probably look at performance, et cetera, and through potentially a search committee or a selection committee, which is the norm, I think in most companies, based on conversations with different executives and board members, they probably are not looking at off-the-job behaviors, particularly when someone has been promoted from within. Traditionally, in academics, we always believed for decades that factors such as industry factors, firm factors, countrywide factors basically determine how a person is going to act, so if you want an executive to behave a certain way, give him or her a certain level of incentives and they will respond to it.

The idea is everyone will behave the same to a certain level of incentives given to the person. It’s that assumption. There have been several scholars that have said, “Well, individual human behavior, like Hambrick and Mason, is a very popular study that first said that …” They called it the upper echelons theory, and they said managers’ experience, values, cognitive styles deeply impact their behaviors and organizations, and the idea being, not everybody will behave the same to the level of incentives and these other factors that are presented to them, so individual characteristics matter.

CURT NICKISCH: That sounds when you say it so obvious, but that’s not really … There isn’t a way to kind of qualify that in the whole hiring process.

AIYESHA DEY: Right, and I think one of the challenges is, okay, even if we believe in theory and now, data has shown it, is that individual preferences or character matters, how do we measure it? How do we know these are such intangible, unobservable traits? How do we even know what a person is? I mean, in an interview, you have their CV, you’ve seen what they’ve done at least in their professional life, they are at their best … I mean, how do you know what is deep within a person, so I think one of the challenges is just measurement.

Like how can boards tell? If you think about big frauds that have happened, exposed, yes, you can see, “Oh God, that was a red flag. I can see,” but that’s too late. One of our goals was, “Is there any way we can identify symptoms that could be red flags before anything happened?” That’s the prevent, the millions of dollars of losses that various stakeholders and the economy might face after the fact.

CURT NICKISCH: How did you figure out a research way to sort out these individual differences that might be meaningful?

AIYESHA DEY: The first thing we wanted to do is we wanted to, given that we want to look at individual personality traits or characteristics, we wanted to go away from the firm. If you want to really get to the person, let’s look what they do off the job, when there’s no incentives, no constraints. They act who they are in most cases, and so let’s focus on that.

Then, we wanted to, well, look at, “Well, let’s examine literatures.” Like what are some of the key fundamental traits of human beings that come out as symptoms in their personal outside behavior?

CURT NICKISCH: So you looked at white collar criminals for clues here of things to look for?

AIYESHA DEY: First, we just looked at psychology and criminology, and we read a lot of things, and just this criminology literature suggested the existence of breaking the law, the idea of when you break the law, what it’s … It’s a external symptom. The underlying construct of this external symptom of breaking the law is that you have low self-control and you have a disregard for rules, laws, norms, you feel they don’t apply to you, and you’re willing to do what you want to do regardless of existing norms or rules. That’s the underlying construct, and the way it shows itself, the external symptoms are you’re arrested for just legal records, legal infractions, so we said, “Well, if that’s the case, let’s look at executives with legal infractions in their personal life,” which are potential symptoms of this underlying notion of lack of self-control and disregard for norms and rules.

CURT NICKISCH: So this can range from a speeding ticket, like a driving infraction to physical, sexual assault.

AIYESHA DEY: Yeah, sexual assault, DUI, like anything in their personal life and-

CURT NICKISCH: Murder, bank robberies.

AIYESHA DEY: Well, in our sample of CEOs, we don’t really have bank robbers and ex-murderers, but surprisingly, we have some of the other severe … There’s domestic violence, sexual assault. There’s a lot of such types of more severe infractions in addition to speeding tickets.

CURT NICKISCH: And do those sorts of things come up in background checks, but people get hired anyway?

AIYESHA DEY: That’s the thing. This interesting thing first was like, wowee, there are actually CEOs with this in their backgrounds, so they somehow … I mean, it was in our sample that thousand CEOs, about 20% had such infractions, so 20% of the CEOs somehow were not prevented from that position given their background, either they were not checked or it didn’t matter. Of course, at first, we were like, “Well, these minor infractions, do we care?” Like speeding ticket, most people have them, but then, there were influential researchers like economists, Ray Fisman and Edward Miguel.

One of the things they found is that for a UN convention in New York, the number of parking tickets were highly correlated. Whoever got those parking tickets were correlated with a corruption back in their home country. One conclusion of that is even minor legal violations or infractions are correlated with some bigger corruption or bigger issues, so that made us think that, “Well, we shouldn’t rule out minor,” and yeah, intuitively, it shouldn’t matter, but then, let the data tell us that.

CURT NICKISCH: Yeah. Wasn’t there some research where executives with speeding tickets sometimes had better financial performance, it was a sign of risk-taking that often paid off?

AIYESHA DEY: I don’t recall. In our study, we checked for it. We actually don’t find … We do find an upside for our other character measure, which I can talk about in a bit, materialism, but for this, we actually don’t find higher upsides necessarily, and we control for risk-taking and a host of other characteristics. You see, we’re not capturing risk-taking.

We’re capturing this other construct, hopefully. Of course, I should note, these are empirical proxies. Of course, they’re noisy, but on average, the hope is we capture the construct we’re after. We did a match sample of fraud versus non-fraud firms, and interestingly, we found, even for the CEOs of fraud firms had significantly higher speeding tickets versus CEOs of non-fraud firms.

CURT NICKISCH: Was your study limited to the U.S.?

AIYESHA DEY: Yes, just partly because of the data.

CURT NICKISCH: Sure, so this can vary a lot by country and what you’re able to find out, right, but yeah.

AIYESHA DEY: It could. To the extent, human nature is the same everywhere. I mean, one notion is we would probably see similar effects in other countries, but then again, other environmental institutional differences can come in, and so, of course, it would have to be studied, but I do think there are some international studies that have looked at criminal records and behavior, and they found similar conclusions, so it seems to hold internationally as well.

CURT NICKISCH: Staying with criminal infractions here, speeding tickets, especially if you have a lot of them had a strong Correlation with corporate fraud?

AIYESHA DEY: Yeah, corporate fraud, earnings manipulation. Yeah, and which was initially surprising that, oh wow, even speeding tickets give you an effect, but then again, this goes back to the theory and what Fisman and Miguel found, that even small infractions are symptoms of a bigger thing. That underlying idea is, “I don’t think rules and laws apply to me. I’m going to do what I want to do, and it doesn’t matter what restrictions are in my way. I’m going to ignore them.” I think that’s the construct, and it interestingly displays itself even in minor infractions.

CURT NICKISCH: What about more serious infractions?

AIYESHA DEY: Yeah. In fact, so after we looked at the fraud outcomes, we even looked at insider trading because that’s a more … Fraud is relatively rare, let’s face it. Maybe one to 2% of all public companies are engaged in fraud. But something like insider trading is much more widespread, that insider trading that we measured is not necessarily illegal, but the way that, if certain executives are consistently benefiting or doing really well compared to others, it could be, one could argue that they have benefited from private material information, but so just to note that this is not necessarily illegal. It could be, but we can determine, at least.

CURT NICKISCH: Yeah, but just kind of suspiciously, it may not rise to the level of the SEC going after these executives, but to the point of your research, it indicated that there’s potentially some.

AIYESHA DEY: Exactly. Yeah, potentially. Interesting thing in that research is we went on to ask, “Well, okay, so now with the basis of a couple of projects, we see that those with criminal infractions and the off-the-job in their personal lives seem to be correlated with these kinds of acts on the job as well, what about the structural governance systems? Can they prevent this kind of behavior? Can they discipline these executives?”

What we found is that good structural governance can discipline minor record holders, the speeding tickets, but the severe ones were making the profits anyway despite those. That was potentially alarming, I guess, to regulators and boards that, well, it only goes so far.

CURT NICKISCH: Beyond criminal records, you also looked at materialism as an indicator of bad executive behavior, and this is so interesting to try to figure out what materialism is for someone who’s paid millions of dollars often.

AIYESHA DEY: Yeah.

CURT NICKISCH: How did you figure out a way to look at that?

AIYESHA DEY: Right. I mean, I think the first is, the notion is that your focus is so much on wealth, possession, status, all of these things, that you go after it despite the cost it may impose to others, the environment, your friends, your family, even yourself, so I think that’s the underlying construct, the zealous pursuit of material possessions despite the cost to others and the environment. The way it shows itself is, of course, the first thing is lots of luxury possessions, right? That’s the outcome, but again, measuring it in a large sample is a challenge because not everybody having that is materialistic, because remember, it’s not just the possession of luxury items is not materialistic, it’s what you would do to get those, right? What are you willing to engage in behavior that can be bad for your shareholders and other stakeholders because of your zealous pursuit of material possessions?

That’s materialistic. I want to note one thing when you said that CEOs have lots of money. Of course, they’ll spend. Remember, this is when we measured it, it’s relative to other CEOs and your peers and neighbors, so they’re all in the same wealth bracket. I mean, so think about Warren Buffett and think about Dennis Kozlowski, or like similar wealth buckets, but very different attitudes towards acquisition.

CURT NICKISCH: So you looked for things like the size of someone’s boat, the cost of their home, and how it compared to the market that they live in?

AIYESHA DEY: Exactly. Like if their homes or their vacation homes are like two to five times more, then that, in that neighborhood, et cetera, and we control for wealth and all of that.

CURT NICKISCH: What did you find for correlating materialistic behavior for someone at that level?

AIYESHA DEY: For materialistic executives, we also found that the financial reporting risk of their firm is much higher than frugal or non-materialistic executives, but interestingly, the reason why was very different. Like in the first case with the legal record holders, the reason was they themselves perpetrated a lot of the fraud. They were personally named, but for materialistic executives, they themselves didn’t commit the fraud, at least in our sample. However, what they did was because of their management style, they created a culture of loose controls, loose checks so that other people found more opportunity to commit the fraud, so they increased the fraud risk through a culture channel, if you will, where their style created an environment where others found it easier to just take the opportunity to engage in fraud.

CURT NICKISCH: Was there any difference – I’m just curious if there was any difference across industries or geographies?

AIYESHA DEY: Not really. I mean, this, again, you are who you are idea, the nature effect predominates. I mean, of course, a bank sample was banking in the financial sector. It was really interesting after the deregulation of the financial sector, which promoted a lot of risk-taking incentives in there. We actually did find a huge influx of materialistic executives going into that sector, so that was … I mean, of course, there is a self-selection going on, like certain types of people get attracted to certain industries.

CURT NICKISCH: So most boards, is it your understanding that most boards don’t really look at these attributes right now, not directly like this?

AIYESHA DEY: Again, this is based on just conversations with some directors and executives. They probably certainly don’t look at a lavish lifestyle in the off-the-job. They probably don’t consider speeding tickets. Maybe more severe infractions, especially if you’re hiring from outside. Maybe speeding tickets don’t even raise-

CURT NICKISCH: Yeah. You might see a long list and just think, “Well, they have a fast car, or something.”

AIYESHA DEY: Exactly.

CURT NICKISCH: And now you might think twice.

AIYESHA DEY:

Yeah. I mean, again, of course, you don’t want to make your hiring decisions based on speeding tickets, et cetera, but I think one thing we can say based on the data, if there is a lot of such infractions, especially recently, pay attention. It may be conveying a deeper personality trait.

CURT NICKISCH: Is it possible to look for materialistic behavior in a CEO that you might be hiring?

AIYESHA DEY: Again, I should state we did find it for materialistic executives in the bank sample, that they were in the highest returns and the highest risk. They were on both tails, so they can take their firms to highs and lows. I mean, so again, as a shareholder, you might actually want that. If you’re a regulator, thinking of the whole economy, you might think twice, again, so we can’t say based on our research, “Do not hire these people.” However, given what our data has shown, if you observe these behaviors, boards should at least be aware and think about maybe governing differently or asking questions, or potentially they can decide not to hire them, but at least based on this research, you can’t ignore.

CURT NICKISCH: You do hear from a lot of people who hire people and end up making a bad hire, that they say, “You know, there were signs. There was a little voice talking to me.” Right? “I wish I would’ve listened to that more,” and in a way, you’re giving people more data points to actually give more credence, make that little voice a little bit louder so that they can assess the person that’s in front of them as accurately as they can.

AIYESHA DEY: I think you put it very well, Curt. I think that’s really what our research can do, is find observable off-the-job indicators that can give you a little pause to think a little deeper about the person, so the key being observable because we can see these things. We can observe them, and then you can think about what to do with that.

CURT NICKISCH: Hiring a CEO, it’s a crucial, crucial hiring decision. Is there any value in your research for entry-level hiring, mid-level hiring, hiring in other parts of the organization? What can somebody else who’s not on a board or executive committee or a hiring committee for the next CEO take away from this?

AIYESHA DEY: Yeah, and great question. You often see fraud cases that happen in lower levels as well, where the top had no idea of good culture from, so the nature idea probably predominates everywhere. It’s human nature, so we don’t expect it to be very different, and in fact, in a couple of cases, these are case studies I have looked at, we have found evidence of this personality-dominating even in lower-level employees, so again, we haven’t done large sample research on the lower-level individuals, but at least intuitively, to the extent the theory on how human nature presents itself, even on the job, I would say even if you’re making entry-level decisions, why ignore indicators like legal infractions in the past, especially if they’re recent and they’re a lot, given that this has shown up in other aspects?

CURT NICKISCH: Yeah. Got it. Aiyesha, thank so much for coming on the show to talk about your research. This is really, really great.

AIYESHA DEY: Thank you, Curt. Thank you for having me and listening to my work. I really appreciate the invitation.

CURT NICKISCH: That’s Aiyesha Dey, an Associate Professor at Harvard Business School and the author of the HBR article, When Hiring CEOs, Focus on Character. You can find it at hbr.org or in the July, August 2022 issue of the magazine.

If you got something from today’s episode, we have more podcasts to help you manage your team, manage organizations, and manage your career. Find them at hbr.org/podcast, or search HBR in Apple Podcasts, Spotify, or wherever you listen.

This episode was produced by Mary Dooe, we get technical help from Rob Eckhardt, our Audio Product Manager is Ian Fox, and Hannah Bates is our Audio Production Assistant. Thanks for listening to the HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Curt Nickisch.